Global Research: Indonesia, Malaysia, Philippines, and Vietnam
South East Asia
ERIC FINE: I was just in Indonesia, Malaysia, the Philippines, and Vietnam, and one theme that shined through was "the Japanese are coming." A big attraction for Japanese and Korean investments in China is low wages. There are substantial and continuous wage pressures in China and that brings a big challenge for existing investments. The countries that I visited are all seeing substantial interest and in many cases are already seeing inflows from Japan. The Koreans are close on their heels. I don't think the market fully appreciates what a big change this can be. Companies are not just moving there to have low-cost production for their exports. Together, these four countries have almost half a billion people, so it's a fairly large market when you add them together.
I would say increased geopolitical tension in the South China Sea region is another reason why the Japanese and the Koreans are more keen to diversify away from China than they have been.
FINE: We spent a lot of time meeting with the central bank [Bank Indonesia]. The best news is Indonesia’s central bank has a real mandate for macro stability. They've corrected many of the problems that we saw during the market reaction to taper fears and are also broadly supported by Indonesian citizens. The central bank is viewed as responsible for maintaining macro stability. This is not a controversial political issue inside Indonesia and that was very positive to me.
Number two: most of the investors that I know or see when I look at positioning surveys don't have significant exposure to Indonesia. So even with bad news, investors already have low allocations.
The negatives were that I wish I got a little more sense of proactivity from Indonesia’s central bank. I did not get the sense that it was going to aggressively get ahead of the game the way an ideal central bank would. It had a chance to hike rates. The market wasn't expecting it, but if it had, I think that would have really changed investor perception. The other negative is that structural reforms likely will not happen until after elections.
Overall, I came away with a mixed picture on Indonesia. In terms of macro stability, the central bank has got the mandate. I do wish they were pursuing the mandate a little more aggressively. Furthermore, the deeper structural reforms are also going to have to wait until after the elections.
FINE: Malaysia is excellent as always. Its policymakers are really among the better ones in Southeast Asia. The central bank is very professional and diligent. The concerns I have in Malaysia are off-balance-sheet debts that it is guaranteeing. Because they are issuing a lot of guarantees, their official debt levels are not as low as they may seem. That's one issue. Another issue is demographics. Fifty or so years ago, half the population was Chinese and the other half was Malay. Right now it's about twenty percent Chinese. The anecdote you hear is the Chinese send their children to Singapore to work because of greater opportunities. That demographic tendency is negative.
The positives, as I have said, are the policymakers are excellent. The best example of their excellence is reducing the subsidies and raising prices for electricity. In my opinion, that’s a really good reform. The other is that they've got limits on their fiscal spending.
I came away from Malaysia with a mixed picture. Bottom line, I believe that inflation will rise. I don't think they're going to hike interest rates and I don't think they should hike interest rates. But for the next twelve months, it might look like they should raise interest rates and I'd rather not be in a market where it looks like you should raise interest rates even if I believe they're doing the right thing.
FINE: For the Philippines, the negative is that inflation may be rising. They're probably not going to hike rates and they shouldn't hike rates. I think it is a good policy but it's going to look bad. Another negative is that the long end of their bond market is just too gappy and illiquid, and I'd rather not deal with that if I don't have to.
The good news is that the Philippines is one of the most boring countries compared to the other countries in that region, but in a good way. Their policy is very consistent and they had a big improvement in the ease of doing business. The World Bank does a survey on ease of doing business, and the Philippines was one of the most improved in the most recent survey. You can see it through the structure of the economy, the ability of people to go in there and start a business quickly, hire people, and start making profits has improved dramatically. That's a great long-term benefit, but it doesn't do much for me in the very short term. So I came away thinking that the Philippines is nice and boring. It’s a good and safe place but may be too safe in the sense that the returns aren't going to be that terrific for the next twelve months or so.
FINE: Vietnam was terrific. I've been doing EM for 25 years now and it is very rare for me to go to a country and find it to be actually cheap. Forget the asset prices, I mean going to a restaurant and being able to buy a meal at a low price. It's anecdotal, but the Big Mac index exists for a reason. It is a measure of how cheap an economy is. Number two: interest rates are high in real terms. Number three: the government has learned one of the most important first lessons new governments learn. It's a communist government moving to a more diverse political and economic framework. They've learned that macro stability is important. If you don't have macro stability, you might lose power. I think the currency's going to be stable. A devaluation for that country is one or two percent. Interest rates are around eight percent. So I think they are pretty stable.
The real issue there is structural reform. There are a lot of structural issues that don't look like they're going to be addressed. It doesn't really bother me in the short term because I think you're getting more than compensated for that, but at some point there's going to be a conflict between macro stability and structural reform. They're going to have to decide, and it might take a little bit of volatility, but I don't see that becoming an issue for at least twelve months. I came away from Vietnam very positive.
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